OPINION: How the CDTFA Bilked Millions from CA Cannabis Consumers and How We Stop Them

LOS ANGELES-  The voter approved Prop 64 law granted California excise taxing authority on cannabis & cannabis products. The rate of 15% was originally to be collected by retailers. The statutory definition of this taxing authority is specific to mean only the flower or products made from the plant should be taxed. Non-taxable portions of the sale, defined as “cannabis accessories” are defined to mean ANYTHING other than flower or products directly derived from the plant.*

California’s SB 94 moved the point of tax collection from the retailer to the legislatively created “distributor” license. CDTFA then issued Reg 3700 detailing cannabis how tax collection would work. Subsequent guidance by CDTFA intentionally misled most industry participants to collect 15% tax on the entire product price and not itemize out the accessories. This resulted in 100’s mm extra tax being collected from consumers.

Distributors, POS companies, and most of the industry unwittingly allowed this over taxation to become industry standard. By the time some savvy participants caught wind, most ERP’s & POS’s could not accommodate itemizing out cannabis accessories.

Coastal Sun became aware of this in 2020 and requested our distributor to begin applying tax in accordance with Reg 3700. The distributor, Bird Valley, gave us pushback explaining their 3^rd party ERP could not code for itemizing out accessories.

When Bird Valley blew out in July 2022, Coastal Sun utilized self distro for a month and explained Reg 3700 to most of our retail partners. This was the first time most of them learned they were overtaxing the customers. Most of our retail partners were happy to let us itemize out accessories, but they ran into challenges with the POS companies. Reg 3700 requires the accessories to be itemized out across the entire supply chain. Invoices from producer to distributor to retailer must be itemized and the customers receipt must maintain that itemization as well. The POS companies simply did not have the resources to overhaul their systems.

In August of 2022, Coastal Sun signed a distro agreement with Herbl. Prior to signing, we brought to Herbl’s attention the severe over taxation issue and required them to allow us to itemize out accessories on our invoices. We held a meeting with our tax attorney, and some of Herbl’s decision makers including their staff attorney, compliance, and one of the founders. Obviously, no one wants to hear they’ve been complicit in overtaxing consumers and contributing to the industry downturn. After our attorney explained in detail the nuances of the statutes and regs, Herbl agreed with the assessment, and did … NOTHING. They advised, while our case is compelling and most likely correct, changing their SAP would be too difficult and they’d opt for continuing business as usual even if it means overtaxing consumers. We all know what happened to Herbl.

Luckily, some of our customers utilizing “distro hubs” were able to maintain the chain of “accessory itemization” through to their retail stores to ensure customers were taxed fairly.

Recall, also in 2022, many industry activists began working on tax reform which included some well written legislative bills the best of which was introduced by Senator Bradford. His bill made it through the Senate and looked to be gaining serious momentum. Initially both Gavin & Nicole Elliot were tepidly supportive of “some type of tax reform”. The industry became optimistic we’d get some reprieve and maybe a legislative lifelineInstead, what we got by the end of 2022 was the exact opposite. We ended up with a  scheme effectively RAISING the taxes to the consumer.

The next paragraph is allegedly the backstory of how this played out and cannot be substantiated.

At some point the SEUI stepped in to effectively squash industry tax reform hopes. The SEIU is one of the largest political donors in California, and we heard their members are beneficiaries of much cannabis tax revenue in the form of childcare programs. Our understanding was the SEIU pressured Gavin & Nicole to kill all 2022 bills relating to cannabis tax reform so it could be “addressed” in the budget bill as AB 195. This was actually a political workaround to maintain control and ensure the “childcare” programs remained funded.

One key component of AB 195 is moving excise tax collection back to the retailer. This actually would make itemizing out accessories even easier and could possibly have led to the industry rotating out of over taxation and adopting the excise tax structure originally approved by voters. The head of the CDTFA, Nicolas Maduros, was aware of this risk and sought to ensure it didn’t happen, allegedly telling one industry participant “Oh yeah, we’re going to close that loop-hole.”

Head of the CDTFA: Nicolas Maduros

After the passing of AB 195, the CDTFA has made attempts again the actively mislead cannabis retailers into overtaxing customers. In published guidance and webinars, they insist excise taxes shall be charged on the purchase price of the entire consumer packaged good with no mention of cannabis accessories or itemizing invoices & receipts. Some retailers were keen to CDTFA trickery and began applying excise taxes fairly. The CDTFA then saw the real risk that tax revenue would come in way short of expectations if this practice became widely adopted.

This takes us to last week, where the CDTFA in a panicked fit, tried to enact an “emergency” regulation 3802 which they think will mandate excise taxes be applied to the entire CPG and close that pesky cannabis accessory itemization “loophole” once and for all.

Reg 3802 is nonsensical, has no statutory basis, and is a veiled attempt to massively increase the CDTFA’s taxing authority. Luckily this reg is being appealed to the OAL. The industry should also rally together and collectively sue the CDTFA on behalf of our consumers. Concurrently, a class action group should sue the State for the millions of ill begotten tax revenue collected since legalization.

While those legal challenges work themselves out, I’d strongly encourage all participants stand up to the CDTFA’s bully tactics and work together to itemize out cannabis accessories throughout the entire supply chain. Producers, distributors, retailers, 3^rd party vendors large and small must begin implementing the taxation scheme state voters originally authorized and give us a fighting chance.

*See HSC Sections 11018 and 11018.1, 11018.2

Editor: We thank Darren Story of Coastal Sun Farms for his opinions & analysis in this article. Darren is a business development professional with many years of experience implementing innovative solutions to complex business problems. He has a proven track record of fostering company growth through effective investment analysis, strategic planning, and exceptional people skills. He can be contacted via LinkedIn by clicking this link.